Westly Helped Firms Tap State Fund

CalPERS invested $80 million in companies that have indirectly donated to the candidate for governor, who sits on the agency's board.

SACRAMENTO — Soon after taking office in January 2003, state Controller Steve Westly began helping three venture capital firms land multimillion-dollar investments from California's giant pension system, according to public records including e-mails and officials' calendars.

Westly, now running for the Democratic gubernatorial nomination, received campaign donations from individuals associated with each of the funds, campaign finance records show.

At any given time, hundreds of fund managers are angling for CalPERS investments. Westly is one of 13 members of the California Public Employees' Retirement System board, and as the state's chief financial officer, one of the most influential.

The funds include:

* Markstone Capital Group LLC, a fledgling firm that invests in infrastructure and other "old economy" industries in Israel. CalPERS' staff expressed concern about a new fund "in a very unstable part of the world." In search of CalPERS money, Markstone Chairman Elliott Broidy invoked Westly's name in letters to other board members. CalPERS put $50 million into Markstone.

* Perseus LLC, a politically connected East Coast firm. Westly dined with its chief executive and urged CalPERS to consider investing in it. CalPERS' outside investment advisor initially balked at the firm's proposal, but eventually directed $25 million to Perseus.

* Healthpoint Ltd., which was controlled by prominent Democrats, including former New York state Comptroller H. Carl McCall. As The Times reported last month, CalPERS' staff put $5 million into the fund after its proposal was rejected by the same outside advisor.

Representatives of the three funds have donated a combined $213,000 to Westly since he ran for controller in 2002, his first statewide campaign.

Healthpoint partners, one of whom has since been indicted in a kickback scheme involving an Illinois pension fund, helped Westly raise tens of thousands more.

Westly spokesman Yusef Robb said any suggestion that the controller intervened for those individuals because they were campaign donors "is ridiculous and insulting to the men and women at CalPERS, whose hard work and integrity has created the nation's largest and most respected public pension fund."

"There is no litmus test when it comes to companies that Steve Westly refers to CalPERS, other than that they have the potential to increase returns for the fund," Robb said.

Operating with $200 billion in the retirement accounts of California's current and retired public employees, CalPERS is the nation's largest pension fund. It has a large staff of professionals who oversee investments in stocks, real estate and other ventures. The outside consultants that CalPERS hires help direct investments.

CalPERS staffers say board members, including Westly, routinely bring proposals to CalPERS on behalf of political patrons. Business ethics experts warn against such involvement, saying it leaves board members open to charges of using their influence to enrich benefactors.

"The trustee is there for the benefit of the fund, not the trustee," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "As a general rule, trustees shouldn't be involved in picking investments.... Involvement in a specific investment where you have a connection is fraught with potential problems."

Westly's interest in the funds is apparent in an e-mail to him from Rick Hayes, who at the time oversaw CalPERS' investments in venture capital funds. In the missive, dated May 20, 2003, Hayes outlined the status of funds that he and Westly had discussed.

Among the firms mentioned in the e-mail was Markstone Capital, controlled by Los Angeles venture capitalist Broidy, a Republican who raises big money for the GOP nationally. He sought $500 million for a new fund focused on what some CalPERS analysts viewed as risky ventures in Israel. Westly was particularly attentive to that fund.

Desk calendars and memos obtained by The Times show that Westly met and phoned Broidy, or Broidy's partners, half a dozen times between May 2003 and October 2004. Westly also went to Markstone's Tel Aviv office during a 2004 tour of Israel.

CalPERS invested $25 million in Markstone in September 2003, and another $25 million in January this year. Hayes had said in his e-mail to Westly that the most CalPERS could recommend investing was $25 million.

Westly refused to talk about Markstone or any of the other funds he embraced, saying only: "We are always looking at the best companies in California. When I see companies I think have exceptional track records, I am happy to forward them on to the professional staff."

Markstone had little track record. It had been founded only months before Westly brought it to CalPERS' attention in 2003.